Retirement Income Blog

One aspect of retirement planning is protecting the assets you have accumulated.  Estate planning is also about protecting the assets you have accumulated but comes at the issue of asset protection from a different aspect. For example, in retirement planning, one is concerned with asset allocation–the idea of spreading your money among different asset classes so that a decline in one class is offset by an increase in another class.  In estate planning, you protect your assets by forming trusts which can protect assets from estate taxes and claims of creditors.  When retirement & estate planning are coordinated, they become a powerful combination of tools to create and preserve wealth.

However, sometimes, the goals of retirement planning and estate planning compete. When its time to retire, one often has the choice to leave their funds in their employer’s 401k (some companies allow retirees to leave their account with the company) or rollover their funds to an IRA.  Is this an issue of retirement or estate planning?  From a retirement planning perspective, one may have more investment choices in the IRA and thus do the rollover.  From an asset protection standpoint, one’s funds are protected from creditors by ERISA.  Such protection is not automatic once the funds are rolled over into an IRA as creditor protection of IRAs is a state law (note that we are addressing non bankruptcy creditor protection here).  In this case, retirement & estate planning objectives may be in competition–we want the rollover for investment flexibility and we want to keep funds in the 401k for ERISA protection.

Another example where retirement & estate planning compete impacts the trade-off of capital gains and estate taxes.  If, for example, you own real estate that you don’t want to see because of high capital gains tax, you are making a retirement or financial planning decision that saves tax on the gain (currently 15% federal).  However, if the asset remains in your estate when you pass, depending on the estate tax laws in effect currently for estates in excess of $2 million, your heirs will pay 45% tax on the entire asset value.  So do you sell the asset now, pay the capital gains tax, gain liquidity which can be distributed from your estate before you pass or do you leave the real estate in your estate, avoid the capital gains tax yet expose the property to estate tax?

Another example of interdependence of retirement & estate planning the naming of beneficiaries on your IRA.  One may consider this a retirement planning issue involving the proper management of your IRA.  However, it is also an estate planning issue as it involves the distribution of your estate, potentially how much estate tax is paid on your estate (e.g. IRA funds left to charitable beneficiaries are exempt from estate taxes) and also estate liquidity.  Whether one spends more of their IRA funds and less of their non-IRA funds impacts how much of each type of asset remains in ther estate and thus we see that retirement & estate planning are again intertwined.

Last, consider the issue that faces most baby boomers coming up on retirement.  Most will learn a word which is unfamiliar to them–annuitization.  This is the process of converting an asset into an income stream.  While baby boomers parents have left many of them substantial assets, many baby boomers will not be able to leave an estate to their heirs as the boomers will need to annuitize their assets in order to produce a sufficient retirement income.  This is the ultimate competition of retirement and estate planning goals.  Time to get out the retirement planning calculator and consult you estate planner.

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A trust serves to separate legal and equitable title.  In plain English, this means that a trust holds an asset (any asset like a house, car, or bank account) in the name of one person (called the Trustee), but that the asset is really for the benefit of someone else (called the beneficiary).  Why have trust and pursue trust planning?  The use of trusts gives flexibility and power in controlling how your assets are used if you become incapacitated or pass away or desire to control or protect your heirs.  Different types of trusts can actually be created for all kinds of purposes, and you will hear terms like “Special Needs Trust”, “Land Trust”, and “Revocable Trust”.  Trust planning requires that you simply be precise about your desires and what you wish to accomplish so that you get accurate retirement help from a trust attorney who can draft the documents properly. Proper trust and estate planning can result in several benefits:

• reduction of estate taxes
• protection of assets from creditors
• managment of assets for those who don;t have the knowledge or ability to do so
• control of how your bequest i8s used after you’re gone
• avoidance of probate

A Trust is simply words on a piece of paper–words that rare recognized by the legal system as valid documentation of your desires. The most common trust used in estate and trust planning is a revocable living trust, sometimes referred to as a revocable inter vivos trust.  Within the generic living trust are “sub parts” or flavors, such as A-B Trusts, Disclaimer Trusts, QTIP, and QDOT Trusts.  Living trusts are the most flexible type of trust used in trust planning because the trust can be amended or revoked at any time by the competent trustor (the trustor is the creator of the trust- synonymous with grantor or settlor).  Revocable living trusts are the most basic type of trust and often acts as the starting point for estate and trust planning.

Typically, you will be the initial trustee (e.g. person who controls the assets in the trust) of your trust and you will name Successor trustees to manage and control your assets when you are unable or after you pass. As long as you are living and have the mental and physical capacity to act as trustee, you will continue to do so and have full control over all of your assets as you would without a trust including spending, moving assets around, buying and selling real property and investments.  At the time you become incapacitated or upon your death, the named successor trustee (usually a family member but often an attorney or CPA) will gather your assets, pay valid debts, claims and taxes and distribute your assets according to your wishes as directed in your trust.  Selecting a knowledgeable succesor trustee is a crtical issue in trust planning as you want someone who will make good business decisions to settle your estate.

Although a trust allows assets to pass without probate (which can be lengthy and costly court process), a complete estate plan includes a pour-over Will, as a safety mechanism to move any assets into the Trust that may have accidentally been left out.  A will is also necessary to name guardians for any surviving minor children.  Even in the process of trust planning, wills are used.

A Trust can contain provisions that can reduce or eliminate some estate taxes (by divisions of an estate into parts) and a trust permits you to specify conditions for the distribution of your assets.  A living trust does not require a separate tax return during your lifetime, but other types of trusts which are irrevocable are separate financial entities and will have their own taxpayer ID and complete a tax return.   While trust planning may sound complex, it is a common and straight forward process when done by an experienced estate planning attorney.

Typically, trust planning is am arena of financial planning that does not lend it self to tools like a retirement income calculator, financial planning software or monte carlo simulations as this planning is very individualized and is qualitative vs quantitative in nature.

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When an individual dies, assets of the decedent may be transferred based on how their titled or a named beneficiary.  For example, assets held as joint tenants with right of  survivorship pass directly to the other joint owner.  Similarly, IRA accounts pass directly to the named beneficiaries as do payable on death accounts, transfer on death property, and most life insurance and retirement benefits.  For other assets that do not have a named beneficiary, an estate/trust Administration process is necessary.  In the case of a person who dies with a will, that process is called probate and requires proceedings in probate court.  In the case of a person dying with assets in a trust, then probate is avoided and the estate/trust administration duties fall to the successor trustee named in the trust, typically a family member.

It is the probate court’s responsibility, as it is the successor trustee’s in the case of a trust, to ensure the assets are collected, maintained, and distributed among the decedent’s heirs, beneficiaries, and/or creditors according to the direction of the decedent as expressed through a will or the trust.  This process is known as estate/trust administration of a decedent’s estate.
 
After the death of an individual, an estate may be opened by any interested person filing an application to administer the estate. This is usually done by the executor, a family member named in the will.  In the case of a trust, the estate/trust administration is handled privately, not involving the court and can often be accomplished in a matter of weeks, not months.  That is one advantage of estate/trust administration with a trust–speed.  The other advantage of estate/trust administration is privacy.  While matters involving a will involve the court as explained above, these matters become public.  Estate/trust administration handled when the decedent has a trust is handled privately by a family member or someone close to the family and there is no public record.
 
In both cases, will and trust, the estate/trust administration process involves the following steps:

Application for authority to administer the estate and admit the will to probate if one exists;
Appointment by the court of a  fiduciary (in the case of a will);
Gathering assets and obtaining appraisals as required;
Filing the inventory in a timely manner;
Payment of creditors;
Filing of estate and income tax returns and payment of taxes, if any;
Distribution of remaining assets to beneficiaries;
Closing the estate by filing a final account or certificate of termination in a timely manner.

While it’s usually the case that estates are closed once all assets are distributed, in the case of a trust, the estate/trust administration process can continue for years.  For example, the decedent may have specified in his trust to have $20,000 distributed annually to his 20-year-old grandson.  The would require the trustee to administer the trust over the next 60 years or so. While this is not a difficult job by the trustee, the desires of decedents who use trusts can be more involved and require estate/trust admininstartion over decades.
 
Note that the eatate/trust administration issues have no impact on estate taxes due.  Whether the decedent has a trust or will, the same estate tax impact can be accomplished in the design of the documents. Avoiding probate does not mean avoiding estate taxes. Assets left in trust are subject to estate and inhertiance tax just as assets left through a will.  Avoiding estate taxes requires that tax and estate planning be done well before death, coordinated by an experienced retirement advisor.
 
If a decedent has no will or trust, the estate/trust administration process is similar as if a will had existed. However, the State may decide on the distribution of certain assets because there is no documentation of desires from the deceased.

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Estate planning is not just for the rich. It is for anyone that cares about their heirs.  In fact, most aspects of estate planning basics have little to do with money.

Estate planning basics do address the eventual and economical distribution of your possessions and authority but more importantly, how you take care of your loved ones. Many of you may think you don’t have an estate plan - but you do! Federal and state rules will determine who gets what and how much and how you get treated if you become very ill. If not prepared with basic estate planning knowledge, it cost cost money and heartache.

Putting your estate in order can be complex. It depends on how many assets you have, where they are, your family structure – children, divorced and previous children, state laws – and more. But, no matter how small or large your estate is, here are the four tools of basic estate planning. These are your

1. will or trust
2. durable power of attorney
3. living will
4. health care proxy (medical durable power of attorney)

Your will shows your wishes for disposition of your assets and names a guardian for minors. In it state how property in your name should be distributed, name an executor to be in charge of carrying out your wishes, provide for payments of costs incurred in settling your estate. And for your minor children, designate a guardian and name a trustee to protect their inheritances. One estate planning basic is to use a trust in place of a will because it maintains privacy and avoids court involvement in the settlement of your estate.  Additionally, trusts typically contain conservatorship provisions.  If you should lose your mental capacity in your old age, do you want your family to be in court about your care or would you rather have a written plan in advance?  Estate planning basics call for planning ahead.

Also note that in the case of a larger estate proper planning will also include estate tax planning, covered in a future post.

Your Durable Power of Attorney gives someone else permission to manage your affairs if you become disabled or incapacitated. With it, as soon as you become incapacitated, your designated person, i.e. your spouse, adult child or anyone you trust, can manage (pay bills, make decisions) your affairs or you can retsrict that power to only particular assets or accounts. Don’t wait! You can’t create a durable power of attorney once you’ve become incompetent.

Your Living Will – expresses your wishes to your doctors when they must consider use of life-sustaining measures. This is your declaration on what life-sustaining medical treatments you will (or will not) allow if you become incapacitated. For example, you may request that artificial nourishment be (or not be) withheld if you become terminally ill.  You may recall the Mary Schiavo case on this issue which became a national news story only because these estate planning basics were ignored.

A Medical Durable Power of Attorney (or health care proxy) is a crucial and basic estate planning tool - designates someone to make health care decisions on your behalf in the event you no longer can. It’s a document that gives a person you designate permission to make health care decisions on your behalf if you are unable to do so in the future, and perhaps, consistent with your living will. Talk to the person before appointing him, and be sure he or she understands and is comfortable with your wishes, and is strong enough to carry them out despite some family members’ objections.

Seek professional help in planning your estate consistent with your state laws and your particular circumstances. No one will tell you about the estate planning basics.  Be proactive and ASK your retirement advisors or your CPA what you need to do to get your estate in order.

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Many of you are somewhat familiar with the traditional Individual Retirement Account (IRA). It’s a type of retirement account that you can open yourself; it’s not run by your employer. For many people , it’s the bedrock of their retirement plan. Whatever you contribute to it grows tax deferred until you withdraw money. Your IRA savings are taxed as ordinary income in the year you withdraw it.

For 2008, you can deduct your yearly contribution of up to $5000 if you’re not covered by a retirement plan at work. If you are covered, then you can deduct this full amount if you file single (or head of household) with a modified adjusted income of $53,000 or less or file married filing jointly with income of $85,000 or less. For every $1,000 you’re over these income limits, your maximum deductible IRA savings contribution is reduced by $500 for single and $250 for married taxpayers . Nondeductible contributions to your IRA savings aren’t taxed when you take them out - only their earnings.

Tax-deferred compounding of your IRA svaings is the key aspect of an IRA. Deductible contributions help you to get more money in. If you’re taxed at the same or lower rate when you retire then that’s another plus. That’s pretty much the basics. But what else might be important to know for decisions you make as you approach or begin your retirement?

What can we do to increase our IRA savings? For those of you 50 or over, be sure to contribute the extra ’the catch up’ amounts of $1,000 -beyond the standard $5,000. And you can do this for your spouse too. A spousal IRA is an IRA to which a couple contributes on behalf of a nonworking spouse, even when that person earns little or no income. If your spouse is 50 or over too, she can contribute the full $6000.

You can contribute IRA savings to a traditional IRA until year before you turn 70½. This gives you a lot of time to take advantage of catch-up contributions to increase your retirement savings. When you reach 59½, you’re no longer subject to a 10% penalty on withdrawals. But remember, you must begin withdrawing your IRA savings at least the minimum required distribution the year after you turn 70½.

What about bankruptcy? The new bankruptcy law says that retirement accounts are protected from creditors in a bankruptcy. It’s best to consult a lawyer about your IRA savings if you do file bankruptcy and get professional retirement help.   In many states, IRA savings are protected from creditors without a bankruptcy filing.

What else can you use you IRA savings to invest in beyond the usual investments? Although not well-known, you can buy unencumbered real estate (i.e. condos, apartment buildings, single family homes, etc) directly with your IRA. Of course, you can also use your IRA to buy real estate indirectly through a corporation or a real estate investment trust (REIT). But, you can’t use your IRA savings to buy your home or vacation property that you live in, or property that you use in your business. 

Get your copy in order to Maximize your IRA Savings

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A 457 retirement plan is a non-qualified (i.e. does not need to meet the restrictions set up by IRS under section 401) deferred compensation plan for government employees and tax-exempt organizations. The plan designed to comply with the rules of Internal Revenue Code section 457 is referred to as a Section 457 retirement plan. Employees are allowed to defer compensation on a pre-tax basis through payroll deductions that further allows them to defer federal and sometimes state taxes until the assets are withdrawn. In effect, a 457 retirement is quite similar to a 401k plan used by for-profit employers.

Participants in the Section 457 retirement plan can defer income up to 100% of the employee’s compensation limited to an annual amount set by IRS–$15,500 for 2008 plus a $5,000 catch-up contribution for people age 50+.

The types of entities that can establish a 457 retirement plan are states, subdivisions of states, instrumentalities or political subdivisions of states, or any entity other than a governmental unit that is exempt from federal income taxes. Governmental units that are exempt from federal income taxes include the following types of organizations:

charitable organizations
religious organizations
educational organizations
private hospitals
private foundations
labor unions
trade associations
fraternal orders
farmers cooperatives

Note that these tax exempt entities may also have a 401k plan for their employees and the employees may contribute to both plans up to the $15,500 maximum for each. There are no contributions by the employer with 457 retirement plans as there are with 401k plans. Additionally, your account in a 457 retirement plan can be rolled over just like a 401k, into an IRA or other qualifying tax sheltered plans. Unlike a 401k, if you retire or leave an employer before age 59 1/2, there is no 10% penalty for accessing your 457 retirement plan balance. Typically, employers that provide a 457 retirement plan will also provide assistant from retirement consultants to help understand the intricacies.

Below is a chart showing the differences and similarities between a 457 retirement plan and 401k plan. If you are eligible to participate in a 457 retirement plan, the decision to contribute would be part of the considerations of your whole retirement income plan.

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These plans are sometimes offered to employees of state and local governments.

Deferred retirement options plans are offered to employees who continue working past normal retirement age and want to retire rich.  In most cases, the employee would stop accruing benefits under the defined benefit plan (a plan that provides a retirement benefit based on the employee’s earnings, age and tenure with the government). The deferred retirement option plan creates another retirement pot whereby the employer contributes money to the employee’s retirement account separate from the defined benefit plan.  These amounts are not actuarial determined and may be a fixed annual amount.

Suppose that Sue is covered by a defined benefit retirement plan which provides that she will receive an annual benefit beginning at retirement of 3 % of average final compensation times years of service (this is a typical defined benefit formula). Suppose further that the retirement plan permits Sue to retire as early as age 60 with 30 years of service.  If Sue had average final compensation of $20,000 a year at age 60, and had achieved twenty years of service at that point, she could retire immediately with a benefit of 3% x 20 (years of service) x $20,000, = $12,000 annual retirement benefit from the defined benefit plan. If her employer offers the defined retirement option plan, she could continue working and the her employer would freeze her benefit from the defined benefit plan at $12,000 annually but also contribute $12,000 for each addiitonal year, for up to five years, that Sue works to her new plan.

That’s the basic working of a defined retirement option plan but they may have other features.  For example, in some instances a COLA or a “thirteenth check” (an additional payment each year equal to one month’s benefits) will be applied to the basic benefit. In some instances, the employer and/or the member will make additional contributions to the account over the period of continued employment. The methods for crediting interest vary widely: earnings may be credited at a “formula rate” (e.g. the funding rate for the plan), at a fixed rate set forth in the plan, based on an independent index (e.g., T-bill rates), at a rate which depends on the discretion of the employer or some other party, or based on actual earnings . In some instances, the member can obtain the  benefit only by foregoing the right to continued employment at the end of the defined retirement option plan period.

State and local governments offer deferred option retirement plans in order to retain valued employees past retirement age and as a way to not add additional obligations to their defined benefit plan funding burden. Because for many years defeined benefit plans were designed to get employees to retire early, they are poor mechanisms for getting employees to stay.  Thus the defined retirement option plan. Employees like the plans because it enables those employees who may have “maxed out” on the benefit payable under a defined benefit plan to continue to accrue benefits. Even for those who have not maxed out, the rate of accrual is often more favorable than continued accrual under the defined benefit arrangement. In many instances, the defined retirement option plan benefit is payable as a lump sum, while the defined benefit is available only as a lifetime annuity.

For other ideas on increasing retirement benefits, visit the retirement planning center of this site.

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Know what you need when you seek a retirement planning consultant.  Make a list of questions you want answered.  Some retirement planning consultants have a psychology and therapy background and deal with the issues of transition of working to not working.  They address such retirement planning issues as:

Leaving the friendships and social interaction of work
How to use your time so that you feel productive
How to adjust other elements of your lifestyle—exercise, eating, when you wake

If you are concerned about these types of issues than the retirement planning consultant you seek will typically have a PhD in psychology or counseling.  On the other hand, many people seek help with financial planning for retirement.  Such people would seek a retirement planning consultant  with a financial background.  They need answers to questions such as:

Do I have enough money to retire
How do I handle my 401k rollover
How do i set up my portfolio for a consistent monthly income to cover my needs
What do I need to do estate planning?
Where should I live?

If your questions and concern are in the financial arena, you want a retirement planning consultant that has  a financial background and may have the CFP(r) or ChFC credential.  You may find that you need both types of retirement plan consultant—one that has a background in the psychological aspects of retirement and one with the financial background.  There are more and more professionals that have both. 

Some psychologists have supplemented their knowledge by gaining a CFP(r) credential and gaining the experience to assist you in both realms.  Additionally, some professionals from the financial arena have focused on life coaching, an emerging field for financial advisors.  They have obtained training through The Financial Life Planning Institute or the Kinder Institute of Life Planning.  Here is a synopsis of what a retirement planning consultant learns:

“Within the profession of Financial Planning and advising, a new approach has emerged from a core group founded in the USA by George Kinder and Richard Wagner.  Shifting the emphasis of the planning relationship to assisting clients in formulating their “life of choice” first, advisers then establish the financial decisions that will support the unfolding life plan and its financial requirements.”

Start your search with appropriate keywords and it won’t take very long to find the right retirement planning consultant in your area.

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There are several types of employer sponsored retirement plans and your employer likely provides ONE of these.  You don’t have a choice but you want to have a basic understanding of the plan being offered to you and you want to participate as a way to maximize your retirement investing. Employers have these plans in place as a benefit that helps then attract better employees.  By making use of the plan, there is typically a tax savings to you.  In prior years, the money that went into the plan was contributed by the employer but that’s less and less true.  Most employer sponsored retirement plans now call for contributions from the employee such as 401k plans in for-profit companies and 401 and 403 plans in non-profits.
Employer sponsored retirement plans are called qualified plans because they comply with section 401(a) of the Internal Revenue Code. Employer contributions are tax-deductible and may be subject to vesting schedules. Participant contributions are always immediately vested. All contributions (employer and participant) and earnings are tax-deferred until they’re withdrawn.
Money purchase plans
A money purchase plan is a pension plan that has a mandatory annual contribution by the company. Company contributions can be as high as 25% of wages, up to IRS limits which change annually. The contribution formula is set by the plan terms. Contributions can be subjected to a vesting schedule. For example, if you leave after 2 years of employment, you may get 20% of your accounts value, after 3 years, 30% of your account value, and so on.
Profit-sharing plans
This is not a good name because profit sharing plans have nothing to do with sharing profits. In fact, with a profit-sharing plan the company management arbitrarily decides how much to contribute to the plan each year, up to 25% of wages. Vesting typically applies as described above as it does with most any employer sponsored retirement plan where the employer is contributing money.
401(k) plans
Most popular in for profit companies is the 401k because the company does not need to contribute anything to the plan, although many companies do.  These employer sponsored retirement plans allow you, the employee, to contribute funds for your retirement, similar to putting money in an IRA but you can contribute more to a 401k. By making pretax contributions, participants have an opportunity to reduce their current taxable income while saving for retirement. Some 401k plans also allow Roth contributions (no tax deduction today, but all earnings are withdrawn tax free, thereby maximizing retirement income).  Some companies provide a matching contribution as an extra incentive for the participants to contribute.

Participant deferrals do not count toward the deductible limits. Matching contributions may be subjected to a vesting schedule. Both participant and employer-matching contributions are subject to discrimination testing which is a way that the government insures that the plan is benefiting many employees, not just the highly paid.
Other employer sponsored retirement plans:
Simplified Employee Pension plans (SEP)

SEP contributions are funded with employer discretionary contributions and can be up to 25% of pay for each eligible employee. Participant contributions are not allowed except for some SARSEP plans still in existence. All employer contributions are made to IRAs for the benefit of the eligible employees and are 100% immediately vested. Contributions and earnings grow tax-deferred until the money is withdrawn by the participant but these types of plans have become less popular with the increased use of 401k plans.
Savings Incentive Match Plans for Employees (SIMPLE) IRAs
A SIMPLE IRA is a retirement plan for small businesses. The company must either match participant contributions (dollar for dollar up to 3% of pay) or make a contribution of 2% of pay for all eligible participants. Contributions are 100% immediately vested. To sponsor a SIMPLE, a business cannot have more than 100 eligible employees during the preceding calendar year.
403(b) plans
A 403(b) is a retirement plan for employees 501(c)(3) organizations on-profit organizations. Participants can make pretax contributions of up to $15,500 for 2008. Some organizations match participant contributions. Similar to a 401(k) plan, participant pretax contributions are 100% immediately vested, but matching contributions may be subjected to a vesting schedule.

Here are the contribution limits for 2008:

Employer-Sponsored Retirement Plans — 2008 Contributions

^* For individuals who are age 50 or older.

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Here’s how to understand defined benefit plans.  IRS allows, up to limits, the amount a business owner can contribute to a plan so that at retirement, he will have enough in his plan to generate an annual income equal to the income they had while working. The annual limit for this type of self employed retirement plan  in2008 is $185,000. Because older business owners have less time to build up their plan balance, they can contribute more than younger business owners to reach a particular dollar goal. However, a special type of defined benefit plan, the 412i plan allows contribution that are much larger.

The most powerful plan for maximizing tax deductions for the self employed is a 412i retirement plan.  This type of self employed retirement plan may not be a good idea if you have employees. A 412i plan allows you, the self employed individual to generate large tax deductible contributions, enjoy steady, tax-free earnings, while minimizing the amount of contributions that must be allocated to the employees if you have employees. 

A 412i self employed retirement plan must be  funded with life insurance and annuity contracts—i.e. you cannot invest in mutual funds, stocks, etc.  Section 412i allows current contributions to be calculated using the guaranteed cash values and annuity purchase rates of life insurance products. This means that the amounts that a business owner can contribute and deduct are far larger than with other types of self employed retirement plans.

Following is a sample of the maximum deductions available for a 55 year old business owner under different qualified plans:

Comparison of Qualified Plans
Plan Type               Owner’s Maximum Deduction
 
Profit Sharing                               46,000
Money Purchase                           46,000
Comparability                              46,000
Traditional Defined Benefit Plan 145,201
412(i) Plan                                  339,857
Source: 412i plans inc.
 
Once started, the annual contributions to this type of self employed retirement plan are mandatory.  Therefore, the business owner should have a stable cash flow or other source of funds.  The 412(i) plan may not be the ideal plan for all situations and businesses. It works best when there are very few employees (less than five); and where the owner is fifty years old or within 10 years of retirement and is older than any of the firm’s employees (the amount of tax deductible contribution is limited by the owner’s age, the older the owner, the larger the contribution) .
The major disadvantage in this type of self employed retirement plan is the lack of flexibility in investments. The plan must be funded exclusively through insurance contracts in order for all benefits to be guaranteed.  On the other hand, this may be attractive if the plan owner also has estate planning requirements for life insurance.

Unlike the plan vanilla defined benefit plan, which require an actuarial calculation annually and are thus more expensive to maintain, a 412(i) self employed retirement plan needs no actuarial certification, as only enough money to provide the guaranteed benefits can be paid to the plan. There can be no over-funding or under-funding problems.

You cannot get this type of plan at a bank or brokerage firm (typically).  This type of self employed retirement plan is designed and supplied by an insurance professional or a knowledgeable retirement advisor as part of your retirement income planning and estate planning.

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